UK: Foster Poultry Farms: Concerns For Contaminated Products Insurers

On 9 October 2015, summary judgment was ordered against insurers
in the coverage case of Foster Poultry Farms v Certain
Underwriters at Lloyd's. This decision of a Californian
district court, applying New York law, deserves the attention of
all those involved in Contaminated Products insurance underwriting
and claims.

Background

The background facts are widely-known, and can be summarised
simply. In 2013, Foster Farms ("Foster") became
implicated in an outbreak involving Salmonella Heidelberg,
one of over 2,500 Salmonella serotypes. More than a dozen
US states were affected. Later, on 7 October 2013, the US Food
Safety and Inspection Service ("FSIS") served a Notice of
Intended Enforcement on Foster, referring to concerns about
Foster's inadequate Salmonella control, as well as
various sanitation issues. There followed various measures,
including a phase of intensified Salmonella sampling of
Foster's consumer-ready packaged chicken.

On 6 December 2013, FSIS issued a Letter of Concern to Foster,
highlighting that current levels of positive results were still
high, including in "products related to ... outbreak
clusters associated with ... Salmonella Heidelberg". This
letter also remarked on a high number of sanitation issues, and
asserted some of them "may directly or indirectly
contribute" to Salmonella. The numerous
sanitation issues included live cockroaches.

Cockroaches were observed again on 28 December and 7 January
2014. On 8 January, there was a further sighting, and this provoked
a Notice of Suspension the same day. The Notice referred to
"egregious insanitary conditions", allegedly
demonstrating that Foster had "failed to prevent
conditions that could lead to insanitary conditions, where products
may have been rendered adulterated and/or injurious to
health." The Notice also asserted that
"cockroaches and other pests can transmit ... bacteria ...
increasing the chances of product contamination rendering the
product unsafe".

The facility resumed operations on 22 January 2014, but Foster
was not permitted to sell 1.3 million pounds of chicken, which had
been produced on 7 and 8 January. Foster incurred substantial
losses, and claimed under its Product Contamination policy for
losses including over USD 8 million in loss of profits, and more
than USD 4 million for increased cost of working. It also claimed
against its pest control consultant.

Insurers declined the claim on multiple grounds, including (for
Accidental Contamination) lack of evidence that destroyed product
was actually contaminated, lack of injury risk, and (for Government
Recall) lack of a recall.

Judgment

The Court decided in favour of Foster, and its findings
included the following:

The relevant production errors were
Foster's failures to comply with sanitation requirements

The policy did not expressly require
evidence of actual contamination, for example a positive test
result, but in any case there was such evidence, as three out of
eight test results on 8 January 2014 were positive for
Salmonella

The use of regulatory
"reasonable probability" language in the
Government Recall endorsement infl uenced the meaning of the
Accidental Contamination requirement that product
"would" lead to bodily injury

"Bodily injury"
was not defined, and New York law considers it to include pure
emotional injury (which, Foster argued, any consumer would
suffer)

Under Government Recall, the word
"recall" was not defined, so was interpreted
broadly, to include withholding from commerce

Analysis

The Court appeared to be guided by a broad, simple view that
Foster had probably made harmful product. It may have been
influenced by Foster being implicated in outbreaks of
Salmonella Heidelberg (before and after January 2014), and
appeared to consider that this strain can survive heating to the
recommended temperature of 165°F. The evidence also suggested
insurers had decided not to exclude Salmonella risk.

Numerous questions arise from this summary judgment. For
example, it is not clear what precisely the Insured Event was. The
importance of identifying the event is obvious, as it determines
policy attachment, notification duties, and the starting point for
time-limited cover. One interpretation of the Court's decision
is that the Insured Event error was failure to comply with
sanitation conditions on 7 and 8 January 2014. However, the
coverage status of similar errors, which had been occurring during
several months before this, appears not to have been fully
addressed.

Furthermore, on the question of whether actual contamination was
required, the policy had several relevant provisions that were not
referred to in the judgment, including:

The Insured Event was entitled
"Accidental Contamination", and there was no
policy provision saying that headings and titles were irrelevant to
interpretation

Aggregation for Accidental
Contaminations depended on whether each
"contamination" was caused by or contributed to
by the same error

There was a condition precedent
requiring samples of Insured Product to be retained to assess
whether there had been an Accidental Contamination

Moreover, it is not clear whether the Court considered the risk
of harm existed because of Salmonella, or
Salmonella Heidelberg in particular. FSIS tolerates a
certain level of Salmonella in raw chicken, and does not
consider this to be an adulteration, for reasons including that it
is practically unavoidable, and should also be eliminated by
cooking to 165°F. If any and all presence of
Salmonella in raw chicken is a coverage trigger, this may
be concerning for insurers.

Next steps

Even though the Court found in favour of Foster, there may be
arguments on causation and quantum. Interesting questions could
include the date of the Insured Event, and the extent to which loss
might have been caused by any policy breaches on the part of
Foster.

In any event, the judgment leaves open a number of key coverage
questions, a few of which we have highlighted above. Contaminated
Products insurers would be welladvised to review wordings and
exposures, particularly regarding Salmonella risk.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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